The Dividend Cafe - The Mystical Psychic Garden and You

Episode Date: April 5, 2024

Today's Post - The stock market dropped this week and it has given me a chance to write a Dividend Cafe about one of my favorite topics – the crucial importance of predicting the future, reading the tea leaves, and all that good stuff. I have strong opinions about people’s talent in such projections and the relevance of such to one’s long-term financial success. So today we are going to just have at it and talk about this week’s market volatility and what it means to you. Some of you are going to be really, really disappointed (if I did my job right). Jump on in, to the Dividend Cafe. Links mentioned in this episode: TheDCToday.com DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Hello and welcome to another edition of the Dividend Cafe, the first Dividend Cafe of the second quarter. And it comes as markets have hit a batch of volatility this week. Now, I wrote the Dividend Cafe this morning, Friday, April the 5th, and markets were down about 1,200 points on the week, a big portion of that coming from a down 500-point day on Thursday. I'm now recording in the middle of the market day on Friday, and markets are up 400 points today. And so who knows, you know, we're going to end up down a lot on the week, it may end up being quite a bit less than it had been. But the point is all still the same,

that this was a week in which we entered the second quarter of the year, with a lot of momentum from markets from the first quarter. The Dow was up over 2% in March. The S&P was up over 3% in March. The Dow was up over 6% in Q1. The S&P was up over 10% in Q1. And so literally four days ago, the narrative was, oh, is this rally going to continue? Can all these good things keep going? How high can we go? And then after a couple of days of being down a couple hundred points here, 300 points there, and then it was a few days in a row, it got to be down 1,200 and right now down 800 as I'm recording, but it's immaterial. I don't care where it ends up when I'm done recording or where it

ends up when you're listening to this. The point being that there's all this up and down movement in a very, very short period of time that people are asking what it means in a future context. And so even though I had about 14 other subjects I considered writing about today, what a wonderful opportunity to mock a lot of other people. So that's what I'm going to do is mock an idea that deserves to be mocked. This absurdity that there is something that is happening or just got done happening in markets that tells you what's about to happen in markets. And there isn't and there never has been.

And that is a fine thing because, as we're about to discuss, it's totally immaterial to what a good investor and the proper achievement of actual financial goals represents. Let me start with the obvious. Any time that the narrative goes from a Monday to how high can we go to Thursday, how low are we going to go, should already answer for you that no one has any idea what the heck they're talking about. That the sentiment could shift this much. Even just from me writing this morning to recording this afternoon, you have this kind

of up and down movement. Now, in hindsight, the retroactive, I had a little bit of a debate with a friend of mine at Fox yesterday. I was in the green room to record Kudlow. And I want to say her name because I actually adore this person. But she was saying, don't you think markets churned yesterday because at the time it was that day because of this? And I said, well, it could have been, but we don't know. And she said, no, I think it was. And I talk about this a lot that nobody ever really knows for sure, but there are certain things that are more obvious than others. And you have a 9-11 event and markets drop. You're like, yeah, I think it was probably because of 9-11. Okay, that's true.

But in a given day, markets up a few hundred, down a few hundred, there's not only the possibility of multi-causal explanation, but there's also certain self-fulfilling prophecies that fold, like, oh, because this thing happened, it led to more of this happening. There's all kinds of stuff like that that goes on. It's armchair Monday morning quarterbacking. It's very, very fallible, as are all things in life that are not falsifiable. If you can't disprove the theory of the case, then you can't prove it.

And you are kind of wasting your time. Other than banter and banter sort of, you know, it occupies a lot of people's time. That's fine. Predictively though, I mean, dear Lord, who possibly believes that what happened yesterday tells us something about what's going to happen the next day. And in fact, if it did, if I wanted to look at historical pattern recognition, I would say that 80% or more of the time over the last 16 years that you had two, three, four days in a row of markets dropping, it was predictive or excuse me, not predictive, but it ended up being preceding a market rally higher three, four, six months later. And so most of the time, actually buying those dips has been efficacious, not indicative of, oh, because we went down 400 points today, it means we're going down 4,000 points tomorrow. It doesn't mean we're not. And this is why I jokingly say, if someone were to say, hey, the markets are down

a lot this week, what's it mean for the future? And the type of person who would answer that question with, well, I think it means that our model says we're going to be potentially going down 11.5% before we... I used a theme of kind of a psychic and tarot card reader and this sort of mystic person that I make an analogy between that and someone who would dare to answer that question or answer it that way. And in a lot of ways, I don't think it's fair what I'm doing because I'm not being totally fair to the psychic. fair to the psychic. But it is just rank grift, charlatans that would dare answer that question as if they have any authority on which to answer it. Now, what would I say? Because I get asked all the time. You can ask me right now in your mind, David, the markets are down at X number of hundreds of points this week. What's it mean for the future? And the right answer is we might go down a lot in the short

term. We might go down a little. We might go up a little. We might go up a lot and we might not really move at all. Those are five outcomes. And that's my answer. And the reason is not because I'm avoiding it. And it's not because these other people are smarter than I am. They might be, by the way, but this is not proof of it. It's because I don't know and no one has ever known and there's nothing embedded in the information that would cause anyone to know. Well, a trend starts and then, no, it doesn't. You don't know a trend became a trend until you have the gift of hindsight. Noah trend became a trend until you have the gift of hindsight. The prophetic ability is not there. Descriptively, I agree that I can look back and say, oh, when this happened, it ended up leading to this.

And so I'm able to read a history book as well as anyone else or look at a chart and tell what line is up and what line is down. And you're able to do it. We're all able to do it. That part's not really rocket science. What is impossible to do is predict from a short-term movement what it means longer term. Now, you say, David, you do macroeconomic analysis. Are you saying you can't formulate a view as to where things are going? And I say, first of all, that's not what we're talking about. I have very strongly held

views about macroeconomic conditions. I can describe what's happening in short-term scenarios, and I can look at a longer-term belief about what might be happening in the fiscal side of policy, governmental spending and growth and tax and regulation. And the monetary side, which monetary economics has been a big study of mine and focus of mine for much of my adult life. And I have a view as to what challenges get presented by monetary policy over long periods of time. And then the geopolitical side, I do chime in on it a lot, but it's usually to chime

in to point out the only thing that's changing are the characters and the colors of the uniforms. If the broad statement is there's some bad things going on in the world and they continue to go on, then that's just pick a decade and it's true. And then one year it's Russia invading Ukraine and it's Hamas' horrific attack on Israel. And another year or another decade it was Cold War and it was in Iran or this or that. I've written about this before, so I don't want to beat the dead horse. The world's not going to become a safe place on this side of glory. is not going to become a safe place on this side of glory. Okay. I believe geopolitically that there's a part of the risk premium in markets that comes from the fact that we live in a reasonably unsafe world and that there are on the margin times, you know, I think end of the cold war,

I think an expansion of the liberal order, democratic societies. I think these things can marginally move the needle, all things being equal. I think markets would rather that China and the US had a good relationship or that Russia quit invading Ukraine and trying to expand its turf in Eastern Europe. I mean, all of those things on the margin can get better and get worse. But no, like there's not this moment coming in which we are dealing with a worse world, excuse me, a better world overall. That geopolitical risk will be there. So my long-term view that is informed by a certain macroeconomic framework, that's not going to change, but it has nothing to do with me saying what will happen in markets next week or next quarter or whatnot. The investment execution we're doing is all rooted to that former hypothesis

that things could go down a lot, down a little, up a little, up a lot, or somewhere in between. And yet, I want to achieve a return that's appropriate, extract risk premium from this world in which we live, where there are profit-making activities going on that I think we can use financial markets to access and drive a result. I want to do that, of course, through our belief in dividend growth, equity, and companies that have the stability and cash flows to continue rewarding us as shareholders from their profits with this piece of fruit they give us from the tree every quarter or what have you. This episode of Dividend Cafe is not specifically focused on dividend growth, but what I'm getting at is there is no part of that investment strategy

that is looking to figure out what one down week means. And to the extent that a down week could mean a much more down month, quarter, year, that's baked in. I accept that all the time. I've studied a lot of history on it and I've been doing this for a long time and I've seen it all. And you say, well, I mean, how can you be so just cavalier about it? Because there's a part of me that has done the hardest work to prepare for it. I don't want clients and investor outcome to suffer from market downturns. And where possible, I want client outcomes to benefit, meaning that reinvestment of dividends at lower prices is accumulating a higher return and investment outcome for them over time. And for those who are withdrawing capital, I want to be able to insulate them from those realities.

So I talk about that all the time, that embedded defensiveness and sort of anti-fragility is in place. And then use asset allocation to control the temperament of the investor to make sure that the up and down movements are not so severe that somebody abandons a high-quality portfolio. That's why we use alternatives or fixed income or other pieces to try to stay within a range of acceptability because of psychology and emotion and just human temperament. That's the basic philosophy. But I believe that those who are right now trying to formulate an investment policy out of short-term movements and predictions are going to be so bad at it, it's embarrassing. They're trying to do something that shouldn't be done. And they're trying to do something that shouldn't be done and they're trying to do something that can't be done because there isn't any information in what happened in the market

yesterday or this week about what's going to happen in the market tomorrow or next week. And there isn't any information in the market about what's going to happen later in the year. And you go, I disagree. I think you can really look at it and it just isn't true. That if all of a sudden there is some trend being formed that tells us something different, that trend is true until it isn't. Then all anybody's doing is reporting on what happens, not predicting what happens.

And I accept there's a lot of people good at reporting what just happened. a lot of people good at reporting what just happened. But calling, reporting, predicting is a real perversion of the English language. And it can lead to very dangerous things when it comes to investment finance. So I just thought this would be a good week to reinforce that lesson, to reiterate what we're doing, how we're doing it, what we're capable of doing at the Bonson Group, what we're not capable of doing, and how we proudly accept all of that. Resist the charlatans. Resist the mystic psychic that is really selling snake oil and focus on the deep fundamentals, the investment philosophy that is far more important to your success than some fake prediction. Thank you for listening. Thank you for watching.

And thank you for reading the Dividend Cafe. We will see you next Friday. And I will be at our office in Oregon, visiting the Pacific Northwest location of the Bonson Group. And I'll be bringing you Dividend Cafe from up there. Thanks and have a good weekend. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC,

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